Price Gouging and the Pandemic: an Economic Perspective

Volume 18 No. 1 Spring 2020

this view, shortages of products like hand sanitizer and toilet Price Gouging and the Pandemic: An paper may not have occurred during the pandemic if retailers Economic Perspective had been able to raise the prices of these products rather than instituting belated and easily circumvented purchase limits. Laurien Gilbert1 Other economists point out that the argument against market During declared states of emergency, sellers that raise prices intervention through price gouging laws ignores two key may face allegations of price gouging, leading to civil suits, issues: the potential for market failures during an emergency, state enforcement actions, and in certain circumstances, and the possibility that when the price of necessary goods federal enforcement actions. The current state of emergency is rises, lower-income households will be unable to afford them. no exception: the coronavirus pandemic has already begun to As to the first issue, an emergency may create market failures generate price gouging complaints, such as allegations that that give some sellers temporary market power. Such retailers and retailer platforms such as Amazon and eBay temporary increases in market power might result from the charged excessive prices for a range of items, including face shut-down of some of their competitors or from consumers’ masks, toilet paper and cleaning products.2 Grocery retailers reduced willingness to comparison shop during an emergency. and egg producers have been targeted by a California class The reduction in competition might allow some sellers to raise action alleging illegal price gouging related to egg prices after prices in response to the crisis-related demand increase by a state of emergency was declared.3 Meanwhile, consumers more than they would have been able to if they faced greater across the country have experienced shortages of certain competition.6 Imposing temporary price limits might mitigate goods. Economists recognize that rising prices and shortages this issue. As to the second issue, economists who support represent two sides of the trade-off inherent in considering price gouging laws point out that charging higher prices for price gouging laws. This article discusses how economics can necessities during an emergency will magnify issues be useful in navigating the line between recognizing the associated with income inequality. While higher prices can market realities of a crisis and running afoul of price gouging help to prevent or reduce hoarding, they may also result in laws. greater consumption of goods by the consumers who can easily afford them, rather than by those with the greatest need Economists debate whether price gouging laws help or during the emergency. 7 For this reason, some economists harm consumers argue that anti-price gouging laws may be worthwhile from a policy perspective if they reduce the unequal impact of an Many economists argue that permitting sellers to raise their emergency on lower-income consumers’ access to necessary 8 prices during an emergency actually makes consumers better goods, even at the cost of reducing market efficiency. off.4 Charging higher prices during an emergency may seem intuitively unfair (particularly if the seller’s margins increase), Pricing and cost considerations involved in assessing but when prices are permitted to rise during an emergency, the price gouging “price signal” helps to limit hoarding or over-consumption by consumers who do not value the scarce commodity enough to Enforcement against price gouging related to consumer goods pay the higher price.5 According to economists who espouse typically occurs at the state level—there is no federal anti- price gouging law, although some federal enforcement has 1 Laurien Gilbert is an associate at Cornerstone Research. The views taken place during the pandemic under the authority of the expressed in this article are solely those of the author, who is responsible for Defense Production Act (“DPA”).9 The fundamental element the content, and do not necessarily represent the views of Cornerstone Research. 2 Lauren Berg, Amazon Price-Gouged Amid Pandemic, Calif. Consumers Say, But Bad Economics, Forbes, Sept. 23, 2016, available at Law360, Apr. 22, 2020, available at https://www.forbes.com/sites/jeffreydorfman/2016/09/23/price-gouging-laws- https://www.law360.com/corporate/articles/1266266/amazon-price-gouged- are-good-politics-but-bad-economics/. amid-pandemic-calif-consumers-say; Dave Simpson, eBay Hit with Virus- 6 Matt Zwolinski, The Ethics of Price Gouging, Business Ethics Quarterly Related Price-Gouging Class Action, Law360, May 4, 2020, available at 18(3) (Jul. 2008), pp. 347-378 at p. 364. https://www.law360.com/articles/1270342/ebay-hit-with-virus-related-price- 7 Michael Hiltzik, Column: Memo to Economists Defending Price Gouging in gouging-class-action. a Disaster: It’s Still Wrong, Morally and Economically, L.A. Times, Aug. 28, 3 John R. Wilke, Federal Prosecutors Probe Food-Price Collusion, Wall St. 2017, available at https://www.latimes.com/business/hiltzik/la-fi-hiltzik- J., Sept. 23, 2008, available at price-gouging-harvey-20170828-story.html. https://www.wsj.com/articles/SB122213370781365931. 8 IGM Forum, Price Gouging, May 2, 2012, available at 4 IGM Forum, Price Gouging, May 2, 2012, available at http://www.igmchicago.org/surveys/price-gouging/. http://www.igmchicago.org/surveys/price-gouging/ 9 Although there is no federal anti-price gouging law, the Department of 5 Donald J. Boudreaux, “Price Gouging” After a Disaster Is Good for the Justice has taken enforcement action during the current pandemic against Public, Wall St. J., Oct. 3, 2017, available at alleged hoarding of medical supplies under an Executive Order pursuant to the https://www.wsj.com/articles/price-gouging-after-a-disaster-is-good-for-the- DPA, in cooperation with the Department of Health and Human Services public-1507071457; Jeffrey Dorfman, Price Gouging Laws Are Good Politics (“HHS”) and Federal Emergency Management Agency (“FEMA”). See

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Volume 18 No. 1 Spring 2020 of a price gouging allegation under state statutes is the claim emergency may be scarce. Even for goods like cloth masks that the seller’s prices rose excessively after a declared state of that did exist prior to the pandemic, the entry of new sellers emergency.10 State price gouging laws typically presume that may make it challenging to determine whether a particular sufficiently large price increases during an emergency are seller is engaging in price gouging, or simply has higher costs evidence of price gouging, placing the burden on the retailer to to supply the product. Or, conversely, the new sellers may present mitigating factors. 11 Sellers that typically exhibit have costs that are not subject to the same shocks as the costs fluctuating margins or seasonal pricing may be at particular of larger producers, thereby distorting cost comparisons. risk of price gouging allegations if they raise their prices during a declared emergency. Low prices and/or margins in Given these challenges, an economic evaluation of the the period preceding the emergency may heighten the plausibility of price gouging allegations might start by mistaken impression of intentional price gouging.12 comparing the pricing behavior of the allegedly price gouging seller to other sellers in the same market. Some state price One unusual feature of the current crisis may be relevant in gouging statutes explicitly adopt this approach. 14 However, distinguishing the pandemic from the sort of emergencies even such a simple comparison can produce misleading envisioned in price gouging laws. The pandemic has conclusions if sellers in the same market priced differently introduced new products into daily life, like cloth face masks before the declared emergency. For example, retailers of and home coronavirus testing kits, as well as introduced new different types (supermarkets, convenience stores, online sellers of these products.13 With these new products and sellers retailers, etc.) might charge different prices for household may come challenges in applying state price gouging laws. goods like hand sanitizer and toilet paper even during normal The relevant price comparisons may be hard to establish for times. The more similar the set of retailers whose prices are products that did not exist before the pandemic, as in the case compared pre- and post-emergency, the more informative the of home coronavirus testing kits. In these cases, historical comparison is likely to be. price data to establish the prevailing price before the state of The FTC’s investigation into alleged gasoline price gouging after Hurricanes Katrina and Rita provides a useful example of Department of Justice, Combatting Price Gouging & Hoarding, May 5, 2020, how economists have attempted to construct informative price available at https://www.justice.gov/coronavirus/combattingpricegouginghoarding; comparisons in past emergencies. In order to ascertain how HHS.gov, DOJ and HHS Partner to Distribute More Than Half a Million widespread price gouging by individual gasoline retailers may Medical Supplies Confiscated from Price Gougers, Apr. 2, 2020, available at have been in the aftermath of the hurricanes, the FTC adopted https://www.hhs.gov/about/news/2020/04/02/doj-and-hhs-partner-to- a three-part “screen” that considered (1) whether the gas distribute-more-than-half-a-million-medical-supplies-confiscated-from-price- gougers.html.; Ballard Spahr, LLP, Understanding Price Gouging Laws station’s price relative to the city average rose immediately During COVID-19, JD Supra, Apr. 6, 2020, available at after the hurricanes, (2) whether the gas station’s price rose https://www.jdsupra.com/legalnews/understanding-price-gouging-laws- relative to other gas stations from the same brand and city and during-98583/. (3) whether its prices were in the top fifth percentile of prices 10 Note that in many states, price gouging laws apply only to retailers. In some cases, upstream wholesalers or distributors may also be subject to price charged in that city for at least three-fourths of the week 15 gouging laws. See Lawrence D. Silverman & Carmen M. Ortega, The Reach following each hurricane. While the FTC emphasized that of Price Gouging Laws: Why Wholesale Distributors Are Not Exempt, even this detailed comparison could not definitively Akerman, Apr. 6, 2020, available at demonstrate that retailers that failed the screen had engaged in https://www.akerman.com/en/perspectives/the-reach-of-price-gouging-laws- why-wholesale-distributors-are-not-exempt.html. illegal price gouging, the FTC’s approach illustrates an 11 Richard Lawson & Shoshana Speiser, Cloudy with a Chance of Price attempt to construct an informative comparison group (gas Gouging, Law360, Aug. 28, 2018, available at stations from the same brand in the same city) and to flag only https://www.law360.com/articles/1076395/cloudy-with-a-chance-of-price- those gas stations whose pricing behavior particularly stood gouging. 12 For example, during an FTC investigation into possible gasoline price out. gouging after Hurricanes Katrina and Rita, the FTC noted that fluctuating margins created a spurious impression of price gouging in some cases. See Federal Trade Commission, Investigation of Gas Price Manipulation and 14 Richard Lawson & Shoshana Speiser, Cloudy with a Chance of Price Post-Katrina Gasoline Price Increases, 2006, at 140-41, available at Gouging, Law360, Aug. 28, 2018, available at https://www.ftc.gov/sites/default/files/documents/reports/federal-trade- https://www.law360.com/articles/1076395/cloudy-with-a-chance-of-price- commission-investigation-gasoline-price-manipulation-and-post-katrina- gouging. gasoline-price/060518publicgasolinepricesinvestigationreportfinal.pdf. 15 Only 1% of retailers failed these screens, and the FTC noted that some of 13 Darrel Etherington, LabCorp’s At-Home COVID-19 Test Kit Is the First to the station owners whose prices were flagged by the three-part test cited Be Authorized by the FDA, Techcrunch, Apr. 21, 2020, available at station-specific increases in cost. See Federal Trade Commission, https://techcrunch.com/2020/04/21/labcorps-at-home-covid-19-test-kit-is-the- Investigation of Gas Price Manipulation and Post-Katrina Gasoline Price first-to-be-authorized-by-the-fda/; Anna Hecht, These 3 Etsy Shop Owners Increases, 2006, at 110-13, available at Have Each Sold Hundreds of Cloth Face Masks since the Pandemic Started, https://www.ftc.gov/sites/default/files/documents/reports/federal-trade- CNBC, May 7, 2020, available at https://www.cnbc.com/2020/05/07/etsy- commission-investigation-gasoline-price-manipulation-and-post-katrina- shop-owners-sell-hundreds-of-cloth-face-masks-during-pandemic.html. gasoline-price/060518publicgasolinepricesinvestigationreportfinal.pdf.

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Volume 18 No. 1 Spring 2020

Even a seller that does raise its price relative to similar firms higher costs, or relatedly, that their margins did not increase during an emergency may not be price gouging if the seller when their prices rose.19 faced unusually high costs during the emergency. During the pandemic, retailers have already encountered significant When does price gouging become an antitrust changes to their daily operations that might well increase their concern? costs, including an increase in remote work, new safety protocols and the pass-through of costs associated with Price gouging is not in itself a violation of federal antitrust disruption to the operations of upstream suppliers. Moreover, law: as the Department of Justice explains, even a the entry of many new sellers during the pandemic may make monopoly—provided that it is a lawful monopoly—may set variation in production costs a particularly important whatever price it chooses. 20 However, allegations of price explanation for differences in sellers’ prices for the same gouging may magnify attention on the conduct of both product. A single-employee business that begins selling cloth individual sellers and firms throughout the industry. 21 In a masks on Etsy (an online platform for sellers of handmade and time of increased scrutiny on consumer prices, retailers should vintage goods) may charge different prices than a large retailer be particularly cautious about conduct that could appear to that sources cloth masks from a factory supplier because they violate the antitrust laws. face different costs.16 On the one hand, these cottage industry suppliers may be less efficient than larger suppliers, but on the As noted at the beginning of this article, the disruption other, they may avoid the costs associated with adopting new associated with emergencies like the pandemic may lead to factory safety precautions. temporary increases in market power for some firms. An increase in market power may heighten a firm’s potential to In past emergencies, economists have acknowledged engage in both price gouging and anticompetitive conduct. For additional factors that may cause some retailers’ costs to rise instance, temporary increases in market power among a small more than others. In its investigation into alleged gasoline number of sellers in an industry could facilitate coordinated price gouging, the FTC acknowledged that much of the price increases—conduct that would qualify both as price dispersion in local retail gasoline pricing could be explained gouging and price fixing. A seller acting unilaterally in a way by differences in retailers’ relationships to upstream that preserves its emergency-generated market power might producers: some retailers purchased from wholesalers at the also face allegations of anticompetitive conduct. Consider a prevailing wholesale price, others had long-term purchasing seller that, in response to an increase in market power during contracts, and still others were vertically integrated with 17 the pandemic, raises its markup (possibly violating price suppliers. The FTC also observed that, particularly during an gouging laws), but offers a discount to customers that have emergency, sellers are likely to have different amounts of invested in the seller’s loyalty program. That seller may be information about market conditions, which may lead to 18 accused of attempting to “lock in” customers if the loyalty inefficient business decisions that increase cost. From the program is potentially preventing efficient rivals from perspective of an economist, a seller that simply passes on a competing.22 legitimate cost increase during an emergency is likely not engaging in price gouging. However, because state price gouging laws often make price increases over the legal threshold presumptively illegal, sellers may still need to 19 CA Penal Code § 396 (2017), available at demonstrate that their price increases were motivated by https://law.justia.com/codes/california/2017/code-pen/part-1/title-10/section- 396/; Edward J. Page & Min K. Cho, Price Gouging 101: A Call to Florida Lawmakers to Perfect Florida’s Price Gouging Law, 80 Florida L.J. 49 (2006), available at https://www.floridabar.org/the-florida-bar-journal/price- 16 Anna Hecht, These 3 Etsy Shop Owners Have Each Sold Hundreds of Cloth gouging-101-a-call-to-florida-lawmakers-to-perfect-floridas-price-gouging- Face Masks since the Pandemic Started, CNBC, May 7, 2020, available at law/; Richard Lawson & Shoshana Speiser, Cloudy with a Chance of Price https://www.cnbc.com/2020/05/07/etsy-shop-owners-sell-hundreds-of-cloth- Gouging, Law360, Aug. 28, 2018, available at face-masks-during-pandemic.html. https://www.law360.com/articles/1076395/cloudy-with-a-chance-of-price- 17 Federal Trade Commission, Investigation of Gas Price Manipulation and gouging. Post-Katrina Gasoline Price Increases, 2006, at 107, available at 20 Directorate for Financial and Enterprise Affairs Competition Committee, https://www.ftc.gov/sites/default/files/documents/reports/federal-trade- Working Party No. 2 on Competition and Regulation: Excessive Prices, Oct. commission-investigation-gasoline-price-manipulation-and-post-katrina- 17, 2011, at 2, available at gasoline-price/060518publicgasolinepricesinvestigationreportfinal.pdf; Scott https://www.justice.gov/sites/default/files/atr/legacy/2014/05/30/278823.pdf. Berhang, Pricing 101 Part 4: Demystifying Retail Fuel Prices and Players, 21 Id. at 5-6. OPIS Blog, Sept. 12, 2017, available at http://blog.opisnet.com/demystifying- 22 While economists recognize that loyalty discounts often represent a form of retail-fuel-prices-and-players. price competition that benefits the consumer, loyalty discounts that amount to 18 Federal Trade Commission, Investigation of Gas Price Manipulation and a price below cost or that prevent efficient rivals from competing in the Post-Katrina Gasoline Price Increases, 2006, at 107-8, 195, available at market may be found to be anticompetitive in some cases. See DLA Piper, https://www.ftc.gov/sites/default/files/documents/reports/federal-trade- Your loyalty discounts and rebates may violate antitrust and competition laws, commission-investigation-gasoline-price-manipulation-and-post-katrina- Feb. 5, 2014, available at gasoline-price/060518publicgasolinepricesinvestigationreportfinal.pdf. https://www.lexology.com/library/detail.aspx?g=28f97281-23a9-4886-954a-

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The unprecedented nature of the coronavirus pandemic has already led to challenges to retailers’ pricing practices under state price gouging statutes and federal enforcement authority under the DPA. As the pandemic continues, allegations of price gouging and possibly of price fixing will likely continue to accumulate. From an economic perspective, it is important to analyze retailers’ pricing behavior carefully, taking into particular account the many factors that may cause costs to increase during the pandemic, potentially leading to large price increases that do not imply proportionate growth in retailer profits.

e7de6f40be7b; Department of Justice Antitrust Division, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act, Jun. 25, 2015, available at https://www.justice.gov/sites/default/files/atr/legacy/2008/09/12/236681_chap ter6.pdf

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